Market Overview

Community Bank System Reports Second Quarter 2019 Results

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Community Bank System, Inc. (NYSE:CBU) reported second quarter 2019 net income of $45.0 million, or $0.86 per share on a fully diluted basis. This compares to $44.6 million in net income or $0.86 per share reported for the second quarter of 2018. Operating diluted earnings per share, which exclude acquisition expenses, realized gains on the sale of investment securities and unrealized losses on equity securities, were $0.80 for the second quarter of 2019. This compares to operating diluted earnings per share of $0.86 in the second quarter of 2018. Increases in net interest income, nonbanking financial services revenues, realized gains on the sale of investment securities and a decrease in the provision for loan losses were offset by a decrease in noninterest banking revenues primarily related to the impact of the Durbin Amendment on interchange revenues, higher operating expenses, a higher effective income tax rate and an increase in fully-diluted shares outstanding.

On a linked quarter basis, fully-diluted earnings per share increased $0.06, or 7.5%, due to realized gains on the sale of investment securities and an increase in net interest income, offset, in part, by an increase in operating expenses and higher income taxes.

Second Quarter 2019 Performance Highlights:

  • GAAP EPS of $0.86
  • Operating EPS of $0.80
  • Net interest margin of 3.80%, up seven basis points over the second quarter of 2018
  • Deposit funding costs of 0.22%
  • Annualized net charge-offs of 0.08%
  • Return on assets of 1.68%
  • Return on tangible equity of 17.74%
  • Noninterest revenues (excluding realized gains on sale of investment securities) represent 38.8% of operating revenues
  • Nonbanking financial services revenues were up $2.2 million, or 6.1% over the second quarter of 2018

"Our second quarter operating results reflect another solid and productive performance characterized by consistent and effective execution of our ongoing business strategy," said President and Chief Executive Officer Mark E. Tryniski. "Solid execution by both our core banking and financial services businesses worked to offset a $0.05 reduction in earnings per share related to the Durbin debit interchange price restrictions, which became effective for the Company in the third quarter of 2018. Although the yield curve has flattened, the Company recorded a $1.5 million, or 1.7%, increase in net interest income over the prior year second quarter. Earning asset yields were up 15 basis points from the prior year second quarter, while funding costs increased nine basis points, resulting in a seven basis point improvement in net interest margin over the second quarter of 2018. Total average deposits were up $92.3 million, or 1.1%, compared to the linked first quarter, but ending deposits were down $131.5 million, or 1.5%, due to a seasonal net outflow of municipal deposits. Deposit funding costs remained well below industry and peer averages at 0.22% for the quarter, and the funding mix remained strong with almost 70% of total deposits in checking and savings accounts. Total ending loans increased $18.0 million, or 0.3%, during the second quarter despite a $39.9 million decrease in municipal loans as seasonally expected. Average total loans were up $21.0 million, or 0.3%, as compared to the linked first quarter and were up $44.0 million, or 0.7%, as compared to the same quarter last year."

Mr. Tryniski added, "In the first quarter of 2019, we announced a definitive agreement to acquire Kinderhook Bank Corp., parent company of The National Union Bank of Kinderhook. This transaction closed on Friday, July 12, 2019 and the companies were operationally integrated over that same weekend. The transaction extends our banking footprint into the attractive Capital District markets which are similar to the other Upstate New York markets in which we are a strong competitor. It also complements the commitment we made in 2018 when we added an experienced commercial banking team focused on the greater Albany area. We welcome the employees of the former Kinderhook franchise into the Community Bank family and look forward to serving the needs of our customers in those markets for years to come."

Total revenues for the second quarter of 2019 were $149.0 million, an increase of $5.6 million, or 3.9%, over the second quarter of 2018. The Company recorded a $1.5 million, or 1.7%, increase in net interest income and a $4.1 million, or 7.3%, increase in noninterest revenues between comparable quarters. The increase in net interest income was driven by an increase in the yield on earning assets, offset, in part by higher funding costs. The increase in noninterest revenue was largely due to the recognition of realized gains on the investment securities portfolio. During the second quarter of 2019, the Company sold $590.2 million of its available-for-sale Treasury securities with a remaining maturity of less than five years, which generated net realized gains of $4.9 million. The securities were sold when interest rates on the short-end of the yield curve dropped precipitously, providing an opportunity to hold the proceeds in higher yielding interest-earning cash until more attractive securities reinvestment options become available. There were no realized securities gains recorded in the second quarter of 2018. In addition, the Company's revenues increased in all three of its nonbanking fee-based businesses, employee benefit services, wealth management and insurance, by a total of $2.2 million, or 6.1%. Deposit service fees decreased $3.0 million, or 15.7%, including a $3.5 million decrease due to Durbin-mandated price restrictions on debit-interchange fees for banks with over $10.0 billion in total assets, offset by a $0.5 million increase in other deposit related fees. On a linked quarter basis, total revenues increased $6.5 million, or 4.5%, due primarily to recognition of $4.9 million in net realized gains on the investment securities portfolio during the second quarter and a $1.4 million, or 1.7%, increase in net interest income. Excluding realized gains on investment securities, noninterest revenues contributed 38.8% of total operating revenues for the second quarter similar to the linked first quarter and second quarter 2018 results.

The Company recorded a $1.4 million provision for loan losses in the second quarter 2019. This was $1.0 million less than the amount recorded in the second quarter of 2018, and reflected an improvement in the Company's asset quality metrics between the quarterly periods. The non-performing loan to total loan ratio stood at 0.39% at the end of the second quarter of 2019. This compares to 0.47% at the end of the second quarter of 2018.

Total operating expenses for the second quarter of 2019 were $91.2 million, as compared to $86.1 million in the second quarter of 2018, an increase of $5.1 million, or 5.9%. The increase was driven by a $1.1 million increase in acquisition-related expenses associated with the Kinderhook transaction, a $1.6 million, or 3.1%, increase in salaries and employee benefits and a net increase in all other operating expenses of $2.4 million. By comparison, during the first quarter of 2019, the Company incurred total operating expenses of $88.7 million, including $0.5 million of acquisition-related expenses. Exclusive of acquisition-related expenses, operating expenses increased $1.9 million, or 2.1%, on a linked quarter basis due, in part, to an additional day of payroll in the second quarter as compared to the first quarter.

The Company generated net interest income of $88.3 million during the second quarter of 2019. This represents an increase of $1.5 million, or 1.7%, compared to the second quarter of 2018. In addition, net interest margin improved seven basis points, from 3.73% in the second quarter of 2018 to 3.80% in the second quarter of 2019. The second quarter 2019 net interest income and net interest margin results were favorably impacted by a 15-basis point increase in the yield on loans, a 64-basis point increase in the yield on cash equivalents and an eight-basis point increase in investment securities yields, offset, in part, by a nine basis point increase in the cost of funds. Although the increase in net interest income was largely driven by rate factors, a $44.0 million increase in average loans outstanding; a higher-yielding asset class than cash equivalents and investment securities, and balance increases in lower-cost funding sources, including checking and savings accounts, also contributed favorably to the improvement. During the second quarter of 2019, average balances in lower cost core funding sources, including checking and savings accounts, represented approximately 66% of the Company's funding base, as compared to approximately 64% in the second quarter of 2018. This change in the funding mix helped maintain total funding costs at a favorable 0.28% in the second quarter of 2019, an increase of only nine-basis points over the second quarter of 2018.

On a linked quarter basis, net interest income increased $1.4 million, or 1.7%, while net interest margin was unchanged at 3.80%. Second and first quarter 2019 results were favorably impacted by four basis points due to a $0.9 million Federal Reserve Bank semi-annual dividend, and $1.0 million in commercial loan fees, respectively. Both the yield on earning assets and total funding costs increased one basis point between the first quarter and the second quarter. Due to the Federal Reserve Bank's size-based dividend payment policies, it is anticipated that the Company's semi-annual dividend payment will be reduced in future periods, with an expected semi-annual quarterly impact of approximately one cent per share.

The Company recorded income tax expense of $11.4 million in the second quarter of 2019. This compares to income tax expense of $10.2 million recorded in the second quarter of 2018. The increase in income tax expense was driven by an increase in pre-tax income, including a $4.9 million increase in realized gains on investment securities, and a decrease in income tax benefits from equity-based compensation. The effective tax rate for the second quarter of 2019 was 20.2%, as compared to 18.7% in the second quarter of 2018. The effective tax rate for the second quarter of 2019 exclusive of equity-based compensation tax benefits was 21.3%, as compared to 20.9% in the second quarter of 2018. The effective tax rate for the first quarter of 2019 was 18.5%, which included a higher level of income tax benefits from equity-based compensation.

The Company provides supplemental reporting of its results on an "operating," "adjusted" and "tangible" basis, from which it excludes the after-tax effect of amortization of core deposit and other intangible assets (and the related goodwill, core deposit intangible and other intangible asset balances, net of applicable deferred tax amounts), accretion on non-impaired purchased loans, expenses associated with acquisitions, net realized gain on the sale of investments, the unrealized gain or loss on equity securities and loss on debt extinguishment. The amounts for such items are presented in the tables that accompany this release. Although these items are non-GAAP measures, the Company's management believes this information helps investors understand the effect of acquisition and other non-recurring activity in its reported results. Diluted adjusted net earnings per share were $0.84 in the second quarter of 2019, compared to $0.90 in the second quarter of 2018, a $0.06, or 6.7% decrease, due almost entirely to the previously-mentioned impact of Durbin-related reductions in interchange revenues.

Financial Position

Average earning assets were up $53.5 million, or 0.6%, on a linked quarter basis, from $9.37 billion during the first quarter of 2019 to $9.43 billion during the second quarter of 2019. Average loan balances were $6.29 billion for the second quarter, up $21.0 million, or 0.3%, over the first quarter. Increases in average outstanding balances of consumer mortgages, consumer installment loans and business lending during the quarter were partially offset by a decrease in home equity loans. Average deposit balances were up $92.3 million, or 1.1%, from first quarter levels, due to an increase in retail and business deposits, offset in part, by a net decrease in municipal deposits as seasonally expected. Ending deposits were seasonally down $131.5 million, or 1.5%, between the end of the first quarter and the end of the second quarter due to the net outflow in municipal deposits. Average borrowings in the second quarter of 2019 of $319.5 million, were down $54.2 million, or 14.5%, on a linked quarter basis. This was primarily attributable to a decrease in municipal customer repurchase agreement balances of $26.1 million, or 11.8%, between the periods as seasonally expected and a $25.3 million decrease in average overnight Federal Funds borrowings.

Ending loans at June 30, 2019 were $6.28 billion. This is up $18.0 million, or 0.3%, from the end of the first quarter of 2019 and $2.9 million higher year-to-date. During the second quarter, an $18.4 million increase in consumer mortgages and a $17.1 million increase in consumer installment loans were partially offset by a $14.8 million decrease in the business lending portfolio and a $2.7 million decrease in home equity balances. Ending loans in the municipal sector of our business lending portfolio decreased from $93.8 million at March 31, 2019 to $53.9 million at June 30, 2019, a $39.9 million decrease. Certain municipal customers repay short-term loans and lines of credit annually at the end of the second quarter to meet their fiscal cycle requirements and advance on new loans and lines of credit in the third quarter for the next annual fiscal cycle. The Company expects the average balances in this portfolio to increase during the third quarter of 2019 to levels similar to the first quarter.

Investment securities totaled $2.40 billion at June 30, 2019. This is down $563.9 million, or 19.0% from the end of the linked first quarter of 2019 and $579.4 million, or 19.4%, from the end of fourth quarter of 2018. During the second quarter of 2019, the Company sold $590.2 million of Treasury securities. These proceeds were primarily held in overnight Federal Funds at higher net yields. Despite these securities sales during the quarter, the net unrealized gain in this portfolio was $36.5 million at June 30, 2019, compared to a $7.9 million net unrealized gain at March 31, 2019 and a $16.0 million net unrealized loss at December 31, 2018. The investment securities portfolio transitioned from a net unrealized loss position in December 2018 to a net unrealized gain position during 2019 due to a decrease in market interest rates. The effective duration of the securities portfolio was 2.7 years at the end of the second quarter, as compared to 3.0 years at the end of the first quarter of 2019.

Shareholders' equity of $1.81 billion at the end of the second quarter was $152.6 million, or 9.2%, higher than the prior year period. The Company's net tangible equity to net tangible assets ratio was 10.56% at June 30, 2019, up from 9.00% a year earlier and 9.83% at the end of the first quarter of 2019. The Company's Tier 1 leverage ratio was 11.54% at the end of the second quarter, up from 11.27% at the end of the first quarter and 10.53% a year earlier. These results are primarily driven by strong earnings generation and capital retention over the last four quarters.

As previously announced in December 2018, the Company's Board of Directors approved a stock repurchase program authorizing the repurchase of up to 2.5 million shares of the Company's common stock during a twelve-month period starting January 1, 2019. Such repurchases may be made at the discretion of the Company's senior management based on market conditions and other relevant factors and will be acquired through open market or privately negotiated transactions as permitted under Rule 10b-18 of the Securities Exchange Act of 1934 and other applicable legal requirements. There were no shares repurchased pursuant to the program in the second quarter of 2019.

Asset Quality

The Company's asset quality metrics continue to illustrate the long-term effectiveness of the Company's disciplined credit risk management and underwriting standards. Total net charge-offs were $1.2 million for the second quarter, compared to $0.9 million for the second quarter of 2018 and $2.6 million for the first quarter of 2019. Net charge-offs as an annualized percentage of average loans measured 0.08% in the second quarter of 2019, compared to 0.06% in the prior year's second quarter and 0.17% in the first quarter of 2019. Nonperforming loans as a percentage of total loans at June 30, 2019 were 0.39%, unchanged from March 31, 2019 and improved from 0.47% at June 30, 2018. The total loan delinquency ratio of 0.87% at the end of the second quarter was one basis point lower than the level at March 31, 2019, and two basis points lower than one year earlier. The allowance for loan losses to nonperforming loans was 202% at June 30, 2019 and March 31, 2019, as compared to 169% at the June 30, 2018.

Dividend Increase

During the second quarter of 2019, the Company declared a quarterly cash dividend of $0.38 per share on its common stock, an increase of 11.8% compared to a $0.34 dividend declared in the second quarter of 2018. The second quarter 2019 dividend represents an annualized yield of 2.36% based upon the $64.42 closing price of the Company's stock on July 19, 2019. The $0.04 increase declared in the third quarter of 2018 marked the 26th consecutive year of dividend increases for the Company. "The improvement in earnings and cash flow results continue to provide further strength to the Company's capital accumulation and dividend capacity into the future," said Mark E. Tryniski, President and Chief Executive Officer.

Kinderhook Bank Corp.

On July 12, 2019, the Company announced that it had completed the acquisition of Kinderhook Bank Corp. ("Kinderhook") in an all cash transaction for total consideration of $93.4 million (the "Merger"). In connection with the Merger, Kinderhook's wholly-owned bank subsidiary, The National Union Bank of Kinderhook was merged into the Company's banking subsidiary, Community Bank, N.A. The Merger extended the Company's branch footprint into the Capital District of Upstate New York and added 11 full-service branch locations across a five county area. Inclusive of the Kinderhook acquisition, the Company's total assets increased to approximately $11.3 billion, including total loans of approximately $6.8 billion and total deposits of approximately $9.0 billion. This transaction is expected to be approximately $0.07 - $0.08 per share accretive to the Company's first full year of GAAP earnings, excluding one-time transaction costs.

Conference Call Scheduled

Company management will conduct an investor call at 11:00 a.m. (ET) today, July 22, 2019, to discuss second quarter 2019 results. The conference call can be accessed at 866-337-5532 (856-344-9184 if outside United States and Canada) using the conference ID code 9068098. Investors may also listen live via the Internet at: https://www.webcaster4.com/Webcast/Page/995/30937.

This earnings release, including supporting financial tables, is available within the press releases section of the Company's investor relations website at: http://ir.communitybanksystem.com. An archived webcast of the earnings call will be available on this site for one full year.

Community Bank System, Inc. operates over 234 customer facilities across Upstate New York, Northeastern Pennsylvania, Vermont, and Western Massachusetts through its banking subsidiary, Community Bank, N.A. With assets of over $11.0 billion (including the former Kinderhook), the DeWitt, N.Y. headquartered company is among the country's 150 largest financial institutions. In addition to a full range of retail, business, and municipal banking services, the Company offers comprehensive financial planning, insurance and wealth management services through its Community Bank Wealth Management Group and OneGroup NY, Inc. operating subsidiaries. The Company's Benefit Plans Administrative Services, Inc. subsidiary is a leading provider of employee benefits administration, trust services, collective investment fund administration and actuarial consulting services to customers on a national scale. Community Bank System, Inc. is listed on the New York Stock Exchange and the Company's stock trades under the symbol CBU. For more information about Community Bank visit www.cbna.com or http://ir.communitybanksystem.com.

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The following factors, among others, could cause the actual results of CBU's operations to differ materially from CBU's expectations: the successful integration of operations of its acquisitions; competition; changes in economic conditions, interest rates and financial markets; changes in legislation or regulatory requirements; and the timing for receiving regulatory approvals and completing pending transactions. These statements are based on the current beliefs and expectations of CBU's management and CBU does not assume any duty to update forward-looking statements.

Summary of Financial Data (unaudited)

 

 

 

 

(Dollars in thousands, except per share data)

 

 

 

 

 

Quarter Ended

Year-to-Date

 

June 30, 2019

June 30, 2018

June 30, 2019

June 30, 2018

Earnings

 

 

 

 

Loan income

$74,067

$71,152

$147,770

$140,593

Investment income

20,285

19,853

39,263

38,816

Total interest income

94,352

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